Integration of ESG Factors into Private Equity Investment and Management Processes

Private equity firms are under increasing pressure, especially from their limited partners, to incorporate environmental, social, and governance ("ESG") factors into their investment and management processes. Limited partners expect private equity firms to integrate ESG criteria into due diligence practices, the management of existing portfolio companies, and communications to external stakeholders.

Many private equity firms have signed on to industry guidelines including the United Nations Principles for Responsible Investment (“UNPRI”) and/or the Private Equity Growth Capital Council’s Guidelines for Responsible Investment. Other firms have adopted their own policies. The UNPRI has a specific work stream on responsible investment and private equity and has published guidance for limited partners seeking to ensure that their general partners are working to identify and manage material ESG risks and opportunities associated with their potential and current portfolio companies. 

In working with private equity clients, we have found the following steps to provide a useful framework for developing an approach to ESG considerations:

  • Adopting an ESG policy;
  • Formalizing firm-level ESG committees to develop the firm’s strategic approach to ESG factors;
  • Evaluating internal training needs and begin to provide training on specific ESG topics, as needed, to relevant personnel;
  • Developing tools and guidance to support the incorporation of ESG factors into due diligence on proposed investments; 
  • Developing tools and guidance to support the incorporation of ESG factors into engagement with, and management of, portfolio companies; and
  • Developing strategies for communicating firm’s ESG initiatives to internal and external stakeholders. 

As private equity firms begin to incorporate ESG concerns into due diligence processes for potential investments, ESG considerations may be formally incorporated into due diligence for all investments, or may be integrated into due diligence for a specific category of investments (i.e., investments of a certain size, or investments in particular sectors).  Such efforts can be supported through materials and training that providing guidance on sector-specific concerns. 

Private equity firms also have significant opportunities to integrate ESG factors into their management plans for portfolio companies. In their engagements with portfolio companies, firms can promote best practices, identify areas of concern, and monitor and track performance over time. Firms may engage directly with the CEOs and Boards of Directors of portfolio companies to identify ESG risks and opportunities that can be addressed during the term of the investment.

Finally, as private equity firms seek to demonstrate their efforts to limited partners and other stakeholders, it is useful to have established metrics that can be used to report on performance improvements and value creation both at the firm-level and by portfolio companies.  

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